Never have there been more opportunities and advantages to saving for retirement, yet today’s economic conditions have made a financially secure retirement far from a certainty for most.
Investors in nearly all stages of life have seen their assets take a beating, prompting some to wonder, might a secure retirement be little more than a fairy-tale proposition?
Even before the current economic crisis, American workers were both more prepared for retirement and less confident about it than they have been in years. The Employee Benefit Research Institute, which surveys retirement confidence annually, found earlier this year that just 18 percent of workers were “very confident” in having enough for a comfortable retirement, down from 27 percent in 2007 and the lowest since EBRI’s 1993 survey. At the same time, nearly three-quarters say they or their spouse have saved for retirement, the highest since 2000.
So how can the typical investor weather the current economic storm and make the elusive goal of retirement riches a reality? We turned to four local financial pros to get their advice.
Investor profile | A professional 20-something couple to whom retirement seems like another lifetime, too distant to warrant worries today. They’ve signed on to their employers’ 401(k) plans, but place financial focus on their student loans, credit card debt and near-term plans to buy a house.
The hare ran his race in great spurts of speed punctuated by long restful breaks, and in the end lost to his fabled competitor, the tortoise, who progressed slowly and steadily to victory.
It’s good advice for young investors just starting to save for retirement, say the experts, especially in today’s financial climate.
“The way you build massive amounts of wealth in 401(k) plans is putting a little bit of money in every single month for the rest of your working career,” says Tim Clepper, senior vice president of Robert W. Baird & Co. in Cleveland. “Get a base, start with that base, and then make a commitment to increasing that base every single year.”
While they watch their parents’ generation sweat it out over massive losses in their retirement accounts this year, these 20-something investors have the gift of time on their side.
“In investing, time is your ally,” says Bill Hawke, a principal partner of Cedar Brook Financial Partners in Cleveland. “Time smoothes out volatility.”
Indeed, the current economic crisis may even work in a younger investor’s favor, according to Edward DeTomaso, also of Cedar Brook Financial Partners.
“It’s actually good for them because they’re buying less expensive shares at this point,” he says. “So in theory, it works to their advantage.”
Focus on the basics in these early years, say the experts, such as:
But most importantly, young investors who want to endure the slow and steady race to retirement must make saving a habit.
“It’s really not a question of how much [at this age], it’s a question of creating the habit,” says Coode, who recommends using tools to make saving automatic so it’s less tempting to raid your nest egg. “One of the biggest mistakes young couples make is ... they make it the last dollar they save rather than the first dollar they save.”
Investor profile | This mid-career, two-income family has taken a great fall. Their retirement and college savings accounts have lost more than a third of their value this year, while college looms right around the corner for their teen- and tween-age kids. What should get priority — college or retirement?
Like Humpty Dumpty, this family likely had a comfy perch up on that wall just a year ago, making great strides toward saving for retirement and college tuition.
Now that nest egg has gone splat, with their plans for the future oozing out on the sidewalk. Can anything put this family’s financial plan back together again?
“They’re getting hit hard for a number of reasons,” says Coode. “Their incomes are now up, and they’ve put some money away but have some risk in the market when it fluctuates. They’re eating up a whole lot of their income supporting their house and education and their children.”
With likely 20 years to go until retirement, this couple has some time to allow the rebounding market to repair their retirement investment losses. But what about the more immediate financial need — three kids headed to college within the next half-dozen years and tuition savings plans that have been hit equally hard?
Here’s what the experts recommend:
Keep your hands out of the retirement cookie jar. “Do not raid your retirement account to pay for education,” warns Hawke. New rules allowing IRA funds to be used for education penalty-free may make such a move tempting, but he recommends borrowing for education before moving retirement savings. Why? Such a withdrawal will raise your family’s income, hurting your child’s chances of earning financial aid. Withdrawals from a 401(k) are even worse: Tuition is not a valid reason for a “hardship withdrawal,” so you’ll pay a penalty and lock in your losses by pulling money out of that account. Instead, DeTomaso recommends diverting extra savings for the oldest child into a lower-risk fund, leaving the remainder of college savings in place. “The longer we can leave the existing investments parked where they are, the better opportunity we have for recovery from the down market,” he says.
As hard as this fall has been for the mid-career investor, the experts are trying to help them see this as an opportunity to invest at bargain-basement prices then ride out the storm to recovery.
“In 2008, you’re buying at equity values of 1996 or 1997, a 10-year discount,” says Clepper. “That’s pretty powerful.”
Little Red Riding Hood
Investor profile | Retirement’s right around the corner for this 60-something couple ... or so they thought. Their every-t-crossed retirement plan is now fraught with uncertainties: Will they have to work longer? How much longer? Can they recover quickly enough to stay on plan? They’re well on their way to Grandma’s house, but what will be waiting when they arrive?
Moral of the story | Your path to retirement may be different from what you planned when you started your journey.
It was supposed to be a leisurely trip to Grandma’s house to deliver some treats to her sickbed. But the clever wolf had Little Red Riding Hood heading toward a starkly different destination than she had expected.
Likewise, pre-retirees who’ve been planning and saving their entire working lives are finding that the seemingly short path to retirement has suddenly become treacherous and uncertain.
Can they still retire on schedule? Will they have to work longer? How much of their current lifestyle can they retain? Will retirement be more like being welcomed by Grandma or like being swallowed by a wolf? To answer these questions, say the experts, it helps to know some history. Hawke shows anxious clients a timeline of the stock market’s rises and falls since the Great Depression and insists that despite popular notions, this time likely isn’t different from prior recessions.
“In five years, they will have recovered under normal post-recession markets. They’re going to have recovered all of their losses, plus more,” he says. “So I would say that it’s appropriate they’re anxious, but it’s not impossible that they could still do these things [they’ve planned for retirement].”
Yet the experts agree that the current crisis is far from over — “as we go into recession, we’re only seven innings into a nine-inning game,” says Clepper — and it’ll take some planning to stay on track for retirement. They advise:
And so off to Grandmother’s house we go, but with careful steps and a firm eye on the destination.
“While you’re still working, put as much money into your plan as you can. You really have to supercharge your savings in these last years,” says Clepper. “Now more than ever, it’s important you don’t make mistakes.”
The Little Pigs
Investor profile | They planned. They saved. They retired, sufficiently confident in a retirement plan built like a brick house. But does this retired couple have enough saved to endure all the huffing and puffing of the current economic crisis and the gradual recovery to come?
Brick by careful brick is how many current retirees have built their retirement assets, quite possibly watching as others’ portfolios built of straw or sticks succumbed under the market’s huffing and puffing.
But as the country has sunk into the worst economic crisis since the Great Depression, even those retirees who built their plans of brick are seeing their foundations begin to chip.
“Their fears are well-founded,” says Coode. “Their balance sheet may have shrunk by 20 or 30 percent, and in this environment, there’s nowhere to hide.”
Those anxieties aren’t limited by net worth, either. “People can be worth $30 [million] or $40 million, and they’re still requesting reassurance that ‘Are we gonna be OK? Is this all gonna work out?’ ” says Hawke.
First step, say the experts, is not to panic or make rash decisions. “For the next six months, don’t sell, don’t move out of your house, don’t even look for six months,” says Clepper. “There’s a good chance the recession isn’t that deep, but panic is pushing it down to staggeringly low levels. The market won’t sustain these low levels.”
Other advice for recent retirees from these experts:
Even if you’re like the smart little piggie who built his house of bricks, it’s still essential to keep that house well-maintained to last through this crisis and potential future downturns.
Doing so can make retiring rich an achievable goal rather than a fairy tale.
“Absolutely, they can still do it,” says DeTomaso. “It may require modification. It may require a little more time. It certainly will require them to sit down with someone and rethink where they are and where they want to go, but clearly they can still do these things.”